Social Security Beneficiaries Could Receive Another Mega COLA Next Year
Key Points
Spiking inflation rates have led to a steep increase in expectations for next year's Social Security COLA.
The COLA is based on inflation in the third quarter, so forecasts are all we have to go on at this point.
A larger COLA could actually be bad news for many retirees.
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Social Security beneficiaries have received some extra-large cost-of-living adjustments in recent years, and next year could be another big one. After inflation spiked in 2021 and 2022, retirees and other Social Security beneficiaries received 5.9% and 8.7% adjustments to their monthly payments.
The COLA has trended downward since. Last year's 2.8% COLA looked relatively tame compared to the bumps retirees received earlier this decade. Meanwhile, inflation continues to eat into the spending power of those monthly payments. That could lead to another huge cost-of-living adjustment next year.
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How big could next year's COLA be?
Following the most recent inflation data from May, independent Social Security and Medicare analyst Mary Johnson updated her forecasting model. The result was a forecasted COLA of 4.7% for next year. That would be the fourth-largest COLA since 1990.
The CPI-W, the inflation metric used to calculate the annual COLA, grew 4.4% year over year in May. However, the Social Security Administration doesn't start calculating the COLA until July, so there's still plenty of room for it to change. In fact, Johnson said there's a considerable likelihood that her forecast will continue to climb as more data comes in.
The COLA is based on the average year-over-year increase in the CPI-W during the third quarter of the year. Once the inflation data from September, the last month of the third quarter, is released in mid-October, the Social Security Administration will announce the official COLA for next year. As of now, forecasts are all we have to go on.
Johnson's forecast stands in contrast to The Senior Citizens League, which forecasts a 3.8% COLA for next year. The Federal Reserve's forecast suggests the inflation reading for June will come in lower than that of May. So, Johnson's forecast is certainly an outlier.
The biggest reason for the divergence appears to be different forecasts for gas prices. Oil prices skyrocketed in March as the Strait of Hormuz was closed due to the war in Iran. There are promising developments for its reopening, but the supply shock could lead to persistently high energy prices into the summer. How quickly oil prices come down could be the biggest determining factor in the 2027 COLA.
In the meantime, Social Security beneficiaries are left to deal with rising prices in the here and now. Remember, the COLA is always backward-looking. That means seniors experience higher prices before their monthly payments catch up. In other words, you shouldn't really be rooting for a mega COLA in 2027. Slow and steady inflation with modest increases in your monthly payment from year to year will make budgeting and retirement planning far easier.
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